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Retirement Weekly: Higher interest rates aren’t all bad

The markets giveth, and they taketh away—sometimes simultaneously.

Consider rising interest rates, which most retirees and near-retirees are upset about since they are a big reason why their stocks and bonds have suffered significant losses so far this year. Yet investors may be overlooking a counterbalancing positive effect of those higher rates: Because of them, you now can purchase a better annuity payout than you could have previously.

In other words, while your portfolio may be smaller than what it was earlier this year, each dollar of your portfolio’s net worth goes further than it did before. The net effect on your retirement financial security may be relatively small.

This is the flip side of the argument I made a couple of years ago when interest rates were coming down. At that time, you may recall, I pointed out that while those declining rates helped to increase the value of your stock and bondholdings, they also meant that a given annuity payout was becoming more expensive.

Annuity payout rates aren’t the only way of illustrating how far your portfolio will go in retirement, but it’s one of the standard ways that researchers use to analyze and compare different financial situations as you approach retirement.

The accompanying chart illustrates the rough equilibrium that exists between interest rates and annuity payout rates. Notice that these payout rates are highly correlated with Moody’s AAA Corporate Bond yield. In 2020, when that yield got down to close to 2%, a 65-year old male investing $100,000 in an annuity could have secured a payout of approximately $450 per month, according to Today, with that yield 1.4 percentage points higher, that same $100,000 can secure a guaranteed monthly payout of nearly $500—or nearly 10% more. A comparable increase has occurred for a 65-year-old female.


Your reaction to this will depend in part on whether you see the glass as half full or half empty. The “half-empty” among you will find it depressing that this equilibrium means it is difficult for your retirement portfolio to really get ahead. The “half full” perspective will find solace that, because of that equilibrium, rising rates aren’t causing us to fall behind as much as it might otherwise appear.

To put this another way: Be careful what you wish for when pining for lower interest rates. While your portfolio may become more valuable if and when rates decline, it won’t necessarily buy you any more retirement financial security.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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